Google: Bulls Cheer Revenue-Less, Strategic Waze Deal

By Tiernan Ray

Shares of Google (GOOG) are down $6.01, or 0.7%, at $873.79, after the company yesterday said it will purchase Israeli traffic updates application maker Waze for an undisclosed sum.

Couple bulls sounded off positively today on what they believe was a fairly rich $1 billion or greater purchase price for a company with little revenue.

Hillside Partners’s Rory Maher reiterates a Buy rating on Google shares, arguing that Google can achieve roughly $90 million in annual revenue from Waze’s application without too much trouble. Waze provides its map with real-time traffic information for phones running Google’s Android software, but it is also a popular application on Apple‘s (AAPL) iPhone:

“We believe Google can significantly increase revenue at Waze even if it remains separate,” writes Maher, “leaving the strong synergies between the two properties an option, in our opinion.”

We believe Waze currently generates nominal revenue given it just launched advertising in 4Q12. However, we believe Google can quickly generate $90M in annual ad revenue specific to Waze by integrating Waze’s current self-serve ad platform into its own and offering the Waze product as an additional location-based advertising option. Here are our assumptions: Recent reports indicate Waze reaches about 30M-40M monthly users that are on Waze for about 450 minutes per month, more than Facebook’s estimated 404 minutes per month. Facebook generated $4.50 in ad revenue per user in 2012 so to be conservative we estimate Google can generate $3 per user in its first full year operating Waze $3per user x 30M users = $90M in revenue

Maher also thinks Google’s various resources can enhance Waze’s offerings:

We believe Google Maps has developed valuable features that could fill significant holes in Waze’s service while run separately. Currently Waze is free so the Company can only use open source aerial features, which we believe are not as detailed and robust as Google’s aerial capabilities. Google can now provide better aerial info to Waze for free. • Currently roads are added to Waze maps by its users – Waze doesn’t doesn’t have its own verification capabilities beyond crowd sourcing since it doesn’t have all of the world’s roads mapped. Google does. With Google’s more accurate Maps and GPS capabilities Waze can ensure the Maps users are creating through crowd sourcing are exactly right. Google can use its database of local businesses to tell users about business coming up on their route according to preferences users specify (gas stations, coffee, bagels etc). Businesses could also pay to “stand out from the crowd.”

Needham & Co.’s Kerry Rice reiterates a Buy rating on the stock as well, and raises his price target to $1,000 from $900, without changing any of his estimates, writing that the purchase price reflects a need to keep Waze out of the hands of competitors: “The acquisition keeps Waze out of the hands of Facebook (FB) and Apple, which are reported to have recently shown interest in the company.”

“Given the social aspect of the platform, we believe Facebook was the most serious candidate suitor for the company.” Not only does the deal solidify Google’s lead in location services, writes Rice, but with Apple trying to enhance the mapping application it introduced last fall, “the acquisition of Waze by Google eliminates a quick path for Apple to gain ground on the space.”

Waze, which had raised $67 million in private financing, has had some limited advertising partnerships to date, notes Rice:

Waze generates revenue via advertisements, which we believe to be in the single-digit millions. The Waze app includes pins highlighting advertiser logos such as Best Buy, Dunkin’ Donuts, Jamba Juice, Shell, Walgreens, Whole Foods, and Wyndam Worldwide Hotels. The mobile app also presents coupons to members as they pass particular stores. According to the company, no more than three sponsored pins will show up on the screen at any given time.

Google will likely fold Waze into its own local and mapping efforts, he opines:

Google has invested heavily in its own mapping technology and navigation service, as well as Google Street View. Over the next three years, which is the expected contract period, we believe Google is likely to incorporate the best of Waze’s technology into its own mapping technology. Considering Google’s substantial investment in its own mapping technology and given that Google has been closing businesses that it does not intend to keep funding, we expect at the end of the contract period Google could shut Waze down.

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There are 3 comments

JUNE 12, 2013 1:53 P.M.

Karen Openshaw wrote:

Pennystockchief dotcom (Dot means .), is a central hub for analysis on GOOG stock as it provides great insight

JUNE 12, 2013 2:07 P.M.

Mark Strait wrote:

Is Google buying Waze or buying the Waze to bury it? If I was an investor, I would be seriously worried about Google's buying habits. They are spending 1 billion on what? Microsoft did the same thing and look at them now. They are a gaming company.

JUNE 12, 2013 8:40 P.M.

Anonymous wrote:

After Google's advertising revenue. I wouldn't bank on their bedtime stories. Should they come out with anything like Glass whatever that's capitalizable. Apple will punk them. Real good. Me thinks Google is over priced. Sentiment is ridiculously over positive. Cook is not Ballmer. Not a chance. And Larry has squeaky whining ADHD.

By the way. Samsung's web creeps seem uncharacteristically quiet. Wonder why? If I were them I'd be worried. Once Apple moves on they won't look back at the noodle suckers.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.